THE  PRACTICE  OF  PAYING 
INTEREST  ON  DEPOSITS— 
SHOULD  IT  BE  ENCOUR¬ 
AGED?  s  o  o  DELIVERED 
BEFORE  THE  KENTUCKY 
BANKERS  ASSOCIA  TION,  A  T 
LOUISVILLE,  OCT.  22,  1891. 

SY  E.  C.  BOHNE. 


PRESS  OF 

JOHN  P.  MORTON  AND  CO 
LOUISVILLE,  KY. 


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ADDRESS. 


Mr.  President  and  Gentleynen  of  the  Convention  : 

The  Committee  of  Arrangements  has  selected  me  to  address 
you  on  the  subject  of  “  The  Practice  of  Paying  Interest  on 
Deposits,  Should  it  be  Encouraged?  ”  As  an  abstract  question, 
I  would  answer  unhesitatingly.  No!  If  a  simple  edict  of  mine 
would  abolish  the  practice,  it  would  be  unceremoniously,  im¬ 
mediately,  and  forever  done  away  with.  Considering  generally 
accepted  custom,  and  sharp  competition  between  different  cities 
and  among  banks  themselves,  I  am  inclined  to  answer  that  the 
practice  of  paying  interest  on  deposits  should  be  exercised  less 
liberally  and  more  judiciously. 

The  term  “  deposit  ”  means  money,  or  its  equivalent,  left 
in  a  bank  for  safe  keeping,  and  subject  to  immediate  with¬ 
drawal  in  whole  or  in  part.  The  safety  against  theft  and  the 
elements  offered  by  the  banks  for  the  keeping  of  such  funds, 
the  convenience  of  withdrawing  them  at  any  time  and  in  such 
sums  as  suits  the  depositor,  the  record  of  the  transactions,  the 
legal  safeguard  as  to  evidence  readily  to  be  established  with 
regard  to  their  nature  between  parties  at  issue,  and  the  neces¬ 
sity  of  keeping  accurate  book  accounts  of  the  same  were, 
until  quite  recently,  considered ‘a  fair  and  sufficient  equivalent 
for  the  profit  which  a  bank  might  earn  by  the  temporary  bal¬ 
ances  in  its  hands.  The  desire  to  increase  traffic  by  offering 
extraordinary  inducements,  more  or  less  wise  and  business¬ 
like,  caused  some  banks  to  offer  interest  on  call  deposits 
respectively  on  the  balances  in  their  hands.  At  first  the  rate 
of  interest  so  allowed  was  low,  while  the  rate  of  (interest 
received  by  the  bank  was  high,  leaving  a  handsome  margin 
for  profit  on  such  tran.sactions. 


2 


ADDRESS. 


Gradually  competition,  thoughtlessness,  and  recklessness 
in  management  increased  the  rate  paid  for  deposits,  at  the 
same  time  decreasing  the  rate  obtained  on  loans,  making  the 
margin  for  profit  more  and  more  problematical,  and  in  some 
cases  actually  working  with  loss.  From  the  standpoint  of  an 
individual  it  may  be  nobody’s  affair  whether  or  not  a  business 
transaction  is  profitable ;  but  if  a  bank  manager  loses  sight  of 
the  fact  that  in  handling  his  bank’s  capital  he  is  handling  other 
people’s  investments,  he  does  not  only  fail  in  his  duty  to  his 
stockholders  by  working  without  adequate  profit,  but  he  also 
demoralizes  the  business  for  other  more  conservative  bank 
officers  by  working  for  nothing,  and  such  practice  should  be 
frowned  down.  In  order  to  demonstrate  to  you  the  correct¬ 
ness  of  my  remarks  as  to  the  unprofitable  nature  of  the  inter¬ 
est-paying  business,  I  will  have  to  annoy  3^ou  with  a  few  cold 
figures,  which  will  no  doubt  astonish  those  who  have  paid  but 
little  attention  to  the  subject  at  issue. 

We  will  take  for  example  an  account  averaging  $20,000 
dail}^  balances  at  3  per  cent  interest,  credited  monthl3\  The 
interest  charge  per  annum  will  be  $616.70.  The  daily  trans¬ 
actions  of  that  account  amount  to,  say  $8,000.  The  cost  (ex¬ 
penses  and  taxes)  of  transactions  per  $1,000  are  about  5^ 
cents  per  da3^  Hence  the  cost  for  $8,000  transactions  is  44 
cents  per  day,  or  per  annum  $160.60,  making  total  charges 
paid  for  that  deposit  $777-30.  Of  the  $20,000  balance  there  is 
available  for  loans  what  is  left  after  deducting  the  reserve  held 
by  the  bank.  The  average  reserve  of  all  National  Banks  in 
the  United  States  on  July  9,  1891,  was,  in  strictly  reserve  items, 
22.63,  actually,  counting  all  immediately  available  items, 
29.41.  In  the  reserve  cities  the  available  items  reached  35  per 
cent.  ■  My  own  experience  during  the  last  five  3'ears  shows  a 
reserve  of  29.14  actual  reserve  item,  and  41.51  per  cent  of 
available  items.  Taking  as  norm  the  average  of  above  ex¬ 
treme  figures,  it  is  safe  to  say  that  32.67  per  cent  are  at  all 
times  held  by  banks  in  reserve  cities  in  such  assets  as  are 


ADDRESS. 


3 


available  for  the  immediate  discharge  of  liabilities  on  deposit 
account.  At  this  rate  $6,414  of  the  $20,000  are  held  by  the 
bank  as  reserve,  and  only  $13,586  are  available  for  loans. 

The  average  earning  rate  for  discounts,  according  to  my  ex¬ 
perience  of  the  last  five  years,  was  equal  to  7.106  per  cent,  which 
is  equal  to  a  possible  earning  on  the  loanable  surplus  of  $13,586 
of  $965.42,  against  $777.30  cost,  leaving  a  profit  of  $188.12  on 
the  $20,000  average  deposit,  equal  to  .94  per  cent,  and  counting 
nothing  at  all  for  risk  by  theft,  robbery  or  losses,  nor  for  cost  of 
exchange  or  interest,  nor  loss  of  time  on  foreign  items  sent  by 
the  depositor  and  taken  for  immediate  credit.  This  small 
margin  of  profit  increases  and  decreases  with  the  percentage 
of  reserve  held  by  the  interest-paying  bank.  The  most  reck¬ 
lessly  conducted  bank  makes  the  most  money  out  of  such 
transactions,  while  the  most  conservative  often  actually  loses 
money,  if  it  attempts  to  do  such  business.  Hence  the  practice 
of  paying  interest  on  deposits  results  in  a  premium  on  reck¬ 
less  and  a  detriment  to  conservative  banking,  and  .should  not 
only  not  be  encouraged,  but,  if  possible,  entirely  abolished. 

The  possibility  of  .so  doing  is,  however,  very  remote,  unless 
competition  between  the  different  interest-paying  banks  is  re¬ 
moved,  and  concerted  action  with  this  regard  is  brought  about. 
As  it  is,  it  would  be  detrimental  for  any  one  city  to  abolish 
paying  interest  as  long  as  another  neighboring  city  offers  to 
do  so,  because  interest-seeking  depositors  would  leave  the 
one  and  go  to  the  other.  But  a  correct  understanding  of  the 
subject,  and  consequent  thought  upon  it  will  certainly,  at  a 
future  day,  open  the  eyes  of  intelligent  bank  officers  all  over 
the  country,  and  will  lead  to  a  considerable  reduction,  if  not 
to  entire  abolition  of  the  pernicious  practice. 

So  far  for  interest  on  call  balances.  We  will  now  consider 
interest  paid  on  time  deposits.  And  right  here  at  the  outset  I 
would  state  that,  in  my  opinion,  the  word  “  deposit”  in  connec¬ 
tion  with  these  kind  of  transactions  is  a  misnomer.  A  deposit 
left  with  a  party  for  any  specified  length  of  time,  with  interest 


4 


ADDRESS. 


if  left  for  that  length  of  time,  is  a  loan  rather  than  a  deposit.  A 
bank  receiving  such  time  deposits,  and  claiming  the  right  to 
pay  them  back  at  the  time  of  maturity  only,  should  consider 
such  certificate  or  evidences  of  indebtedness  issued  by  it  as 
“bills  payable”  and  not  as  deposits,  and  should  enter  them 
upon  its  books  accordingly,  and  publish  them  as  such  in  its 
statements.  The  practice  of  increasing  deposits  in  that  way 
is,  strictly  speaking,  not  sound  banking,  and  under  all  circum¬ 
stances  the  statement  of  liabilities  of  the  bank  should  show 
plainly  the  issue  of  “  bills  payable,”  and  the  bank  should  be 

ready  to  bear  the  odium  connected  with  the  fact  of  a  more  or 

* 

less  great  amount  of  that  sort  of  indebtedness  upon  its  pub¬ 
lished  statement  of  condition.  If  the  receiving  bank  chooses 
to  put  money  received  on  time  under  the  head  of  deposits,  it 
should  have  the  required  reserve  to  meet  same  at  all  times  if 
it  proposes  to  pay  them  upon  maturity  only,  it  should  put  such 
funds  under  the  head  of  bills  payable,  in  which  latter  case  it 
would  not  need  to  keep  any  money  reserve  whatever  against 
such  liability.  If  a  reserve  is  maintained  against  amounts 
received  on  time  deposits,  the  interest  must  be  proportionately 
lower  than  if  the  liability  is  considered  a  bill  payable  and  no 
reserve  is  maintained.  The  public  is  entitled  to  a  clear  under¬ 
standing  of  its  rights  and  status  in  such  matters,  and  I  hope 
that  the  honorable  Comptroller  of  the  Currency  and  the  State 
bank  examiner,  if  such  an  ofiicer  is  created  by  law,  will  see 
that  this  point  is  definitely  settled.  Under  the  present  custom 
the  matter  is  much  muddled,  and  conservative  banks  have  to 
suffer  under  the  odium  caused  by  unbusiness-like  proceedings 
of  competitors,  who,  if  it  suits  them,  pay  the  certificates  issued 
to  the  public  for  time  loans  upon  presentation,  and  refuse  to 
pay  them  until  maturity,  if  that  is  more  convenient.  There 
should  be  some  uniform  and  clearly  defined  principle  of  the 
matter  between  lender  and  borrower,  which  would  operate  so 
as  to  avoid  any  misunderstanding,  or  any  conflict  of  interest, 
in  justice  to  both  public  and  banks. 


ADDRESS. 


5 


The  question  of  time  deposits,  their  nature  and  effect,  and 
the  want  of  uniformity  of  understanding,  has  caused  a  great 
deal  of  harsh  censure,  indulged  in  by  the  public  against  the 
banks,  and  is  for  that  reason  alone  greatly  to  be  regretted.  In 
the  present  day,  when  the  state  of  public  sentiment  is  so  de¬ 
plorably  prejudiced  against  banks  and  bankers,  it  behooves  us, 
as  repsesentatives  of  that  honorable  and  essential  branch  of 
the  public  economy,  to  do  every  thing  in  our  power  to  clear 
the  situation,  and  to  bring  about  a  better  understanding  of  the 
relations  between  banks  and  the  public,  and  it  is  particularly 
our  duty  to  avoid  every  thing  by  which  that  unfortunate  hos¬ 
tility  against  the  corporations  we  represent  might  be  increased 
or  seemingly  justified.  The  public  mind  is  biased  against 
financial  institutions  by  many  untoward  circumstances,  para¬ 
mount  among  which  is  the  widespread  publicity  which  news¬ 
papers  seem  to  delight  in  giving  to  the  defalcations  occurring 
in  banking  circles,  which  are  generally  greatly  exaggerated. 
I  speak  from  personal  knowledge  when  I  say  that  there  is 
nothing  more  deplored  by  bank  officers  than  the  laxity  and 
perv^ersion  of  the  law  which  permits  criminals  in  banking 
circles  to  escape  just  punishment.  What,  among  fair-minded 
people,  simply  reflects  upon  the  deficiencies  of  the  criminal 
statute  and  the  indolence  of  the  law  in  this  State  is  charged 
by  the  public  at  large  to  the  banks,  who,  apparently  above  the 
law,  are  consequently  duly  hated  and  proposed  to  be  downed 
by  unreasoning  people.  Every  honest  banker  feels  how  per¬ 
nicious  to  the  interest  of  banks,  and  how  hurtful  to  the  repu¬ 
tation  of  bankers  as  a  class,  such  cases  of  dishonesty  are,  and 
consequently  feels  particularly  aggrieved  at  the  want  of  retri¬ 
bution  and  the  failure  of  the  law  to  punish  dishonest  men, 
and  by  those  means  to  stop  knavery,  or  at  least  to  adequately 
punish  it.  Considering  the  number  of  persons  engaged  in 
banking,  considering  that  over  ninety-five  per  cent  of  all 
financial  transactions  of  the  people  are  made  through  banks, 
and  considering  the  temptations  to  and  offered  facilities  for 


6 


ADDRESS. 


dishonest}^  I  venture  to  say,  without  fear  of  successful  contra¬ 
diction,  that  there  is  not  another  class  of  men  whose  integrity 
is  so  intact  and  whose  honesty  ranks  as  high  as  that  of  bank¬ 
ers.  Because  of  the  knowledge  of  that  fact  in  the  mind  of 
our  fraternity  we  should  guard  that  reputation  with  the  great¬ 
est  jealousy,  and  we  are  particularly  severe  upon  financial  un¬ 
faithfulness  and  criminality.  Hence  we  are,  more  than  any 
other  class  of  men,  aggrieved  when  notorious  wreckers  and 
criminal  abusers  of  confidence  escape  punishment  upon  tech¬ 
nicalities.  Yet  the  people,  who  are  primarily  responsible  for 
the  faults  in  the  law,  instead  of  having  such  faults  remedied, 
abuse  the  banks  and  cast  unkind  reflections  upon  thousands  of 
honest  men  who  are  every  day  occupied  in  serving  the  public 
in  important  fiduciary  functions. 

Another  great  cause  of  the  unpopularity  of  banks  is  the 
necessity  of  adhering  to  strict  business  rules  in  performing 
their  functions,  caused  by  the  exacting  position  of  responsi- 
bilit}^  of  a  person  taking  care  of  other  people’s  money,  which 
position  necessitates  that  minuteness  and  apparent  austerity 
in  a  bank’s  dealings  with  the  public,  and  which  causes  the 
people  at  large,  unjustly  and  unreasonably,  to  consider  banks 
unnecessarily  obstinate,  ceremonious,  and  constrained.  It 
behooves  us  to  counteract  these  adverse  circumstances  b}''  in¬ 
forming  the  public  of  the  position  and  functions  of  a  bank,  of 
its  general  usefulness,  and  of  its  absolute  necessity  to  the 
commercial,  industrial,  and  agricultural  interests  of  the  pres¬ 
ent  day,  by  dwelling  upon  the  faithful  and  honest  work  which 
banks  do  in  the  interest  of  all  members  of  the  communit}^  in 
augmenting  the  functions  of  money  and  in  increasing  its 
powers  for  utility.  We  should  show  how  banks  represent  the 
accumulated  savings  of  the  people  and  are  run  for  the  benefit 
of  the  people,  and  we  should  especially  clearly  demonstrate 
and  impress  upon  the  public  mind  the  fact  that  the  banks  are 
the  only  successfully  available  safeguards  of  the  people  against 
the  aggressions  of  large  capital,  and  that  they,  by  helping 


ADDRESS. 


7 


the  mass  of  people  with  moderate  means,  act  against  the  de¬ 
plorable  tendency  of  the  times,  which  seems  to  be  in  favor  of 
a  rapid  accumulation  of  wealth  in  the  hands  of  the  few,  and 
that  the  banks  are  hence  the  people’s  best  friends. 

You  will  kindly  excuse  this  digression  from  my  subject.  I 

# 

was  led  to  these  reflections  by  an  inexorable  chain  of  thought, 
and,  since  they  are  down  upon  the  paper,  will  let  them  go  for 
what  they  are  worth.  Every  thing  tends  to  show  that  only 
in  approved  business  methods,  conservatively  administered 
with  regard  to  interest  in  deposits  as  well  as  to  every  thing 
else,  lies  the  good  of  stockholders  and  public  both,  lies  the 
safet}^  of  the  banks,  and  the  successful  refutation  of  the  unjust 
adversity  of  public  opinion. 

In  conclusion,  I  would  answer  the  question  put  to  me  by 
the  Committee  of  Arrangements,  after  considering  it  in  all  its 
aspects,  that  the  practice  of  paying  interest  on  call  balances  is 
certainly  unprofitable  to  a  conservatively  managed  bank,  and 
that  it  .should  be  the  aim  of  all  good  banks  in  all  parts  of  the 
country  to  abolish  it,  or  at  least  to  materially  reduce  the  rate 
of  interest  paid.  As  to  interest  on  funds  left  with  banks  on 
time,  I  have  shown  that  they  are  not  really  deposits,  but  par¬ 
take  of  the  nature  of  bills  payable,  and  that,  in  my  opinion, 
such  funds  should  be  treated  as  such  a  liability,  principal  being 
payable  only  at  maturity,  and  interest  at  such  rate  as  may  be 
profitable  to  the  borrowing  bank,  and  that  where  such  loans 
are  payable  on  demand  the  same  remarks  as  made  with  regard 
to  interest  paid  on  call  loans  hold  good. 


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